Above Board - We Actually Do It Right

Some of the best regulated jurisdictions in the world are in the Caribbean. Being above board, and having a reputation for being so, is good for the region and the rest of the world. Over the years, Caribbean jurisdictions have often been perceived, at best as dodgy, or at worst, as engaging in malfeasance. Despite the unwarranted and frequent criticisms, Caribbean jurisdictions continue to remain nimble, strong, and most importantly, legitimate.

In a world where there are constant and consistent demands for transparency in the financial services, the Caribbean has not only risen to the challenge, but now sits at the table of international standard setters and helps to shape those requirements. After the financial crisis of 2008, a new era of global regulatory change came sweeping in, faster-moving than anything recent history had had to reckon with. Many of the basic rules of the road were rewritten, altering how countries and companies manage and navigate the vast array of critical financial products, services and systems. Due to these changes, Caribbean jurisdictions have had to ensure that the international regulatory standards are met.

The Caribbean region has proved itself resilient, embracing regulatory changes to emerge stronger, however, despite the progress made, the allegations against the region continue At the root have been various claims by largely ill-informed third parties about monies being, either illicitly hidden, or taken from developing countries illegally. Claims (some of which are decades old) continue to be widely reported by the media, which in turn have been taken up by political leaders from outside the Caribbean, creating a spiraling maelstrom.

A recently published study commissioned for the BVI by leading international consultants, Capital Economics, addresses the allegations that have been made over the years. The report provides an evaluation of the economic, financial and fiscal impact of the Territory and its investment vehicles on the global economy. It combines new analysis of existing information, statistics and research, with results from major quantitative and qualitative research exercises among a large and representative sample of financial and professional services firms operating in the Territory.

The fact is that global financial centres, large and small, have enabled globalization and the cross-border trade that is at its heart, to happen. Further, the processes in place ensure this trade is supported by jurisdictions such as ours, which are entirely legitimate, and from a regulatory perspective meet the requirements of international standard setters.

The trouble is that the dimensions of the 2008 financial crisis were extraordinary and have left many OECD countries still reeling. As the Capital Economics Report points out “Increasing debt burdens have put pressure on government finances, and while globalization has increased prosperity across the world, not everyone has benefitted equally”. In fact, it is often the lower middle classes in these major developed western economies which have perhaps fared the worst.

How have OECD Governments responded to this ongoing crisis?

Governments have responded by identifying gaps in tax revenues and are placing the public blame for such gaps largely on Caribbean jurisdictions with low or tax neutral bases. We have been easy targets, when in fact such gaps in revenue are much more likely to be down to a lack of tax collecting capacity, maladministration and simple non-payment. So while the noisier advanced western economies have seen sectors of their populations struggle, it is undeniable that globalization has made the wider world a better place.

Through our corporate structures (which are used by the World Bank, the European Bank for Reconstruction and Development and so on), developing countries have greater access to technologies from global markets, including in agriculture and health, better infrastructure and the like. Rather than apologize, the Caribbean should be proud of what it contributes to the rest of the world, and we should be more vocal in that pride.

Panama Papers

While the Caribbean can indeed be proud of the progress it has made, the challenges will continue. On 10 April 2017, following the anniversary of the Panama Papers, the International Consortium of Investigative Journalists (ICIJ) received a Pulitzer Prize for journalism.

From the perspective of the BVI, the Consortium identified roughly 114,000 BVI Business Companies incorporated by Mossack Fonseca since 1977. Most of the BVI Business Companies listed in the Panama Papers have been identified as either ‘inactive’, ‘discontinued’, ‘dissolved’ or ‘defaulted’. The ICIJ was well aware that between 1985 and 1999, 90 per cent of all BVI Business Companies incorporated by that firm were not active – but had they reported the truth evidenced by the facts, there would have been no room for sensationalism.

As we know the world has changed radically since 1977 and the BVI too has transformed, improved and innovated alongside. Given the stringent rules and systems now in place in the territory to stop money laundering, financial crime and the abuse of other jurisdictions’ tax codes, there is every reason to believe that the 30,000 active BVI Business Companies identified in the Panama Papers are legitimate vehicles being used to facilitate cross-border trade and investment. At its heart, by improving the availability of credit and encouraging competition in the domestic banking system, international finance centres boost investment in the major economies, which ultimately supports growth and employment.

Winds of Change

Yet while we have all contributed to globalization and benefitted from the movement, we and indeed the whole financial system were impacted by the global financial crisis in 2008 and consequent changes in global regulatory standards and processes. These reforms appear to be endless and include increasing numbers of TIEAs, AEOI arrangements between Caribbean jurisdictions and their counterparts from around the world; the Multilateral Convention which is being widely adopted; FATCA; Common Reporting Standard; BEPS and the new AML rules.

The Caribbean region has always signaled that we are not interested in illegality in any form. The region's various competent authorities meet regularly under the auspices of the OECD Global Forum, the Financial Action Task Force (FATF) and its regional bodies, cooperating fully with their international counterparts to bring an end to criminal activity that may be related to persons using their structures. Today, the Caribbean is an engaged and active international participant in tax, anti-money laundering and anti-corruption matters, committed to fully supporting the development of a global regulatory framework which is fit for purpose.

Base Erosion and Profit Shifting

Base Erosion and Profit Shifting (BEPS) is a good example of how reputation takes precedence over practical effect. The BVI hosted a BEPS conference for the Caribbean to facilitate discussions with the OECD Global Forum and assess the value of joining the Inclusive framework. After prolonged dialogue between the OECD and ourselves, the consensus we arrived at was that there would be little value in doing so. However, despite this consensus the BVI has joined the inclusive framework on BEPS, along with nine other Caribbean jurisdictions. The reason is entirely down to reputation and the view expressed by the media and others, including influential political stakeholders, that if we are not part of this solution we must be part of the problem. Further, joining the Inclusive Framework is one of the criteria to be used by the EU for their ‘third country listing’ of non-cooperative jurisdictions (or black listing), to be determined by the end of this year. Again, entirely down to reputation.

Improvements to our AML Regime

It is now a FATF requirement that beneficial owners be known, with new enhanced requirements for information and verification. To enhance the BVI’s capability in this area the BVI has introduced a ‘Beneficial Ownership Secure Search System (BOSSs)’. This cloud-based platform balances the need for privacy with the requirement by competent authorities to directly access verified beneficial ownership information efficiently and in real time, without a Corporate Service Provider being aware a search is being made, thereby avoiding any possibility of 'tipping' off.

The Strength of the Caribbean’s Legal Infrastructure

Based on the sheer magnitude of regulatory developments between 2009 and today, Caribbean financial jurisdictions have embraced an ‘adapt or die’ attitude. It is not simply a matter of compliance – it is about preserving our standing as jurisdictions that are stable, transparent and safe for business.

Caribbean Jurisdictions as a whole are known for the strength of their legal systems as they are based on English Common Law. Several Caribbean jurisdictions now have an International Tax Authority (or the equivalent) to allow us to respond directly to the many requests for information from Treaty partners, and to engage directly with the OECD Secretariat, as well as with fellow members of the Global Forum. In the BVI, The Business Companies Act, which is the foundation of our industry, has been substantially updated over the years. A new Arbitration Act was also passed, followed last year by the establishment of a BVI International Arbitration Centre which can now provide support and facilities for arbitration and mediation proceedings. Given our experience in incorporations and the legal frameworks that govern them, we expect this to be a strong area of growth.

Challenges certainly still abound - the cost of compliance for example is a legitimate concern. In some instances, compliance cost has gone up by as much as 60 per cent in only two years. Yet despite all this, the fundamentals remain strong. The fact is that global capital needs the specific attributes which jurisdictions like those in the Caribbean can offer. Our products and services contribute much to globalization, are great for the region and make for good business sense because our clients, while wanting a degree of privacy, also want to know that our offerings are fully above board.

Looking ahead, Caribbean jurisdictions will continue to face a litany of challenges as a new equilibrium is achieved. Legislative and regulatory agility and a strong partnership between industry and government are the secret ingredients required by those who aim to adapt and thrive in this new era. As Caribbean jurisdictions, we have more than established our value in the world. We have done everything right, we are above board but it just does not seem to be enough! My challenge to all is to speak truth to power, to do what we did over 15 years ago, which was to put down a marker, requiring Western economies to start to treat us as equals in financial services. The next move has to be ours!

-- ‘Above Board – We actually do it right’ is an excerpt from a speech Lorna Smith gave at the 2017 Step Caribbean Conference.

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